Beth merger deal raises questions Lukens adds to sales, fosters job cuts, but price may be too high

Basic metals

December 21, 1997|By Sean Somerville | Sean Somerville,SUN STAFF

If 1997 had ended just a few weeks earlier, Bethlehem Steel Corp. might well have viewed it as a year of shrinkage.

It was, after all, the year the steel giant jettisoned its metal forging, cast-iron and structural products businesses and -- at Sparrows Point -- its BethShip Inc. shipyard. In 1997, Bethlehem cut about 2,000 of its 17,500 jobs.

But the Bethlehem, Pa.-based company reversed course last week, announcing the $650 million acquisition of Lukens Inc., a Coatesville, Pa-based steelmaker. The acquisition, expected to be completed in the spring, will be the largest in the memory of Bethlehem executives.

The two companies reasoned that they need to cut costs and improve quality in an ever more competitive steel plate market, conditions that could propel more such mergers, experts said.

"The industry is crying out for consolidation," said R. W. Van Sant, chairman and chief executive officer of Lukens Inc.

While the deal will make Bethlehem a bigger company, it carries a price for Baltimore County.

Sparrows Point will close its plate mill as a result of the merger, a move that will cut 400 jobs in about one year. That's on top of 900 jobs that the Baltimore County plant will lose with construction of a $300 million cold-rolling mill by 2000. Together the two moves will reduce employment at Sparrows Point to about 4,000.

It's not clear how many layoffs will be required to cut the jobs, because many employees may retire. "About half of the people in the plate mill are senior people with over 30 years' experience and about half are junior people with less than five," said Joseph J. Rosel Jr., the president of United Steelworkers of America Local 4727.

And, although the merger will increase Bethlehem's sales from $4.7 billion to $5.5 billion annually, Wall Street has worries. Bethlehem Steel's shares closed below $8 on Friday -- just a little higher than the 52-week low of $7.63 last February and 37 percent lower than the August high of $12.88. After the deal, five of 16 analysts surveyed by IBES International Inc. lowered their estimates of Bethlehem's 1998 earnings per share.

"I think the question is price," said Robert Schenosky, a steel industry analyst for Merrill Lynch Global Securities. "That appears to be the issue. Bethlehem is paying $25 a share. And Lukens has about $20 million to $30 million in pension liability."

Bethlehem will take a $50 million charge to shut down two of six plate mills, including the one at Sparrows Point. The deal will hurt earnings for at least six months, Schenosky said.

"Combining two entities does not necessarily make a stronger entity," said Mark Parr, an industry analyst for McDonald & Co. Securities. "These companies have older mills that may have higher costs."

With the apparent belief that the short-term costs are worth long-term benefits, Bethlehem said the combined company will produce the widest range of plate gauges and grades in North America. The two companies separately produce 2.2 million tons of steel plate a year in six plants, with Bethlehem accounting for about 1.5 million tons.

Together, they will produce the same amount in four plants, said Bette Kovach, a Bethlehem spokeswoman.

Bethlehem is betting that the lower cost and wider range will make the company's steel plate more attractive for use in construction, industrial machinery, farm equipment, transportation, railroads, oil pipeline and shipbuilding. At stake for Bethlehem is a product that accounted for 15.3 percent of its $4.7 billion in 1996 sales, or $720 million. The plate segment was third behind coated sheet, which accounted for 32 percent, and cold-rolled sheet, which accounted for 16 percent. Hot-rolled sheet accounted for 14.7 percent. Bethlehem does not disclose profits earned by its various lines.

"The assets they closed or divested earlier this year were not making money," Schenosky said. "What this acquisition enables them to have is a better relative position in the plate market."

The 12 million-ton North American plate market, worth $5 billion a year, is tough and getting tougher, partly because minimills are increasing their relatively minor presence in the segment.

Minimills use electric furnaces rather than the coal-fired blast furnaces of the larger integrated steel makers and scrap metal as a raw product instead of iron ore. Generally, their costs are lower. "With that in mind, it's going to get more competitive when we get into '98 and '99," Schenosky said.

IPSCO Inc., a Canadian steelmaker, recently built a minimill in Iowa capable of producing about 1.2 million tons of steel plate a year. Nucor Corp., the Charlotte, N.C.-based minimill pioneer, is shopping for a site to build a plate mill. "Prior to 1989, integrated producers had exclusive access to many product markets," said Frank Giarratani, an economics professor at the University of Pittsburgh. "Now, these minimills are taking away market share from the integrated producers in some of them."

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